Trading the Bullish Harami Pattern
Source: Daily FX
Jul 3, 2019 12:13 pm -03:00
Learn to Trade the Bullish Harami
The Bullish Harami consists of two candlesticks and hints at a bullish reversal in the market. The Bullish Harami candlestick should not be traded in isolation but instead, should be considered along with other factors to achieve Bullish Harami confirmation.
This article will cover:
- What is a Bullish Harami Pattern
- How to Identify a Bullish Harami on a trading chart
- How to trade the Bullish Harami candlestick pattern
What is a Bullish Harami Pattern?
The Bullish Harami candle pattern is a reversal pattern appearing at the bottom of a downtrend. It consists of a bearish candle with a large body, followed by a bullish candle with a small body enclosed within the body of the prior candle. As a sign of changing momentum, the small bullish candle ‘gaps’ up to open near the mid-range of the previous candle.
The opposite of the Bullish Harami is the Bearish Harami and is found at the top of an uptrend.
The Bullish Harami Cross
Traders will often look for the second candle in the pattern to be a Doji. The reason for this is that the Doji shows indecision in the market. The colour of the Doji candle (black, green, red) is not of too much importance because the Doji itself, appearing near the bottom of a downtrend, provides the bullish signal. The Bullish Harami Cross also provides an attractive risk to reward potential as the bullish move (once confirmed) is only just starting.
How to Identify a Bullish Harami on Trading Charts
The Bullish Harami will look different on a stock chart compared to the 24- hour forex market, but the same tactics apply to identify the pattern.
Bullish Harami Checklist:
- Spot an existing downtrend
- Look for signals that momentum is slowing/reversing (stochastic oscillators, bullish moving average crossover, or subsequent bullish candle formations).
- Ensure that the body of the small green candle measures no more that 25% of the previous bearish candle. Stocks will gap up, showing the green candle mid-way up the previous candle. Forex charts will mostly show the two candles side by side.
- Observe that the entire bullish candle is enclosed within the length of the previous bearish candle’s body.
- Look for confluence with the use of supporting indicators or key levels of support.
Formation of the Bullish Harami Pattern in the Forex market
The forex market operates on a 24/5 basis which means when one candle closes, another opens at virtually the same level of the previous candle’s closing price. This is often observed under normal market conditions but can change during periods of high volatility. The Bullish Harami pattern in forex will often look something like this:
The small green candle opens at the same level that the prior bearish candle closed at. This is typically observed in the forex market.
Formation of the Bullish Harami Pattern on Stock Charts
Stocks on the other hand, have specified trading hours during the day and are known to gap at the open for many reasons. Some of those might be:
- Company news released after the close of trade
- Country/sector economic data
- Rumoured takeover bids or mergers
- General market sentiment
Therefore, the traditional Harami pattern appears, as seen below for Societe General (GLE FP) which trades on the CAC 40:
Notice how there are numerous areas on the chart where the market has gapped – showing wide open spaces between candles. This is often observed in the stock market.
How to trade the Bullish Harami Candlestick Pattern
Traders can adopt the Bullish Harami using the five-step checklist mentioned earlier in the article. Looking at the below chart on GBP/USD we can observe the following
- There is a clear downtrend.
- A Bullish Hammer appears before the Bullish Harami and provides the first clue that the market may be about to reverse.
- The bullish candle is no more than 25% the length of the previous candle.
- The bullish candle opens and closes within the length of the previous candle.
- The RSI provides an indication that the market is oversold. This could mean that downward momentum is bottoming but traders should wait for the RSI to cross back over the 30 line for confirmation.
Stops can be placed below the new low and traders can enter at the open of the candle following the completion of the Bullish Harami pattern. Since the Bullish Harami appears at the start of a potential uptrend, traders can include multiple target levels to ride out a new extended uptrend. These targets can be placed at recent levels of support and resistance.
How Reliable is the Bullish Harami?
The validity of the Bullish Harami, like all other forex candlestick patterns, depends on the price action around it, indicators, where it appears in the trend, and key levels of support. Below are some of the advantages and limitations of this pattern.
|Attractive entry levels as the pattern appears at the start of a potential uptrend||Should not be traded based on its formation alone|
|Can offer a more attractive risk to reward ratio when compared to the Bullish Engulfing pattern||Where the pattern occurs within the trend is crucial. Must appear at the bottom of a downtrend|
|Easy to identify for novice traders||Requires understanding of supporting technical analysis or indicators. Popular: Stochastics and RSI|
Further Reading on Candlestick Patterns
- The Bullish Harami is just one of many candlestick patterns commonly used to trade the financial markets.
- Candlesticks form an important role in the analysis of forex trading. Learn How to Read a Candlestick Chart.
- If you are just starting out on your forex trading journey it is essential to understand the basics of forex trading in our New to Forex guide
Harami Candlestick Reversal Trading Strategy
Source: Trading Setup Reviews
The Harami candlestick pattern is highly recognizable on your charts. However, like all price patterns, trading the Harami alone is not a good idea. This is especially true when you’re looking for trend reversals.
This article shows you how to trade the Harami candlestick pattern with other tools. In the process, you’ll learn to build a more effective reversal trading strategy.
The Key Trading Concepts
This strategy is straightforward if you already understand the following trading concepts/tools:
If you’re not familiar with them, click on the links above to learn more about each trading concept.
#1: Harami Candlestick Pattern
The first bar of the Harami candlestick pattern represents an exhaustive move. It is an unsustainable thrust in the direction of the trend.
The second bar is a quiet churning of the market that’s preparing to reverse. See it as a window of opportunity.
The best Harami patterns should be triggered quickly. There should not be much followthrough in the direction of the first candlestick. If the market pushes decisively beyond the first candlestick of the Harami, skip it.
#2: Trend Channel
We are aiming for a trend reversal in this strategy.
A trend line helps to track and confirm a trend. After all, you cannot trade a trend reversal without a trend.
You can also expand the trend line into a trend channel.
The channel lines (e.g., 100%, 200%, 300%) then acts as the price action equivalent of overbought and oversold levels. Look for reversal opportunities when the market tests or exceeds the 200% line.
Note to course students: Valid pivots are used for drawing the trend channels.
#3: MACD Classic Divergence
To be clear, we are interested in the classic divergence on the left of the diagram.
A price divergence is one of the best ways to use trading oscillators. It forces you to use your favorite indicator together with price action.
The best divergences are apparent. You shouldn’t need to strain your eyes to spot them.
You can look for divergences with the MACD line or its histogram. In this article, we will focus on price divergences with the MACD histogram.
Harami Reversal Trading Rules
- Bearish Harami at the bull trend extreme, preferably overlapping with a bullish channel line
- Bearish price divergence with the MACD histogram
- Sell as the market moves below the second bar of the Harami pattern
- Bullish Harami at the bear trend extreme, preferably overlapping with a bearish channel line
- Bullish price divergence with the MACD histogram
- Buy as the market moves above the second bar of the Harami pattern
Harami Reversal Trading Examples
Bullish Harami Example
- The market was in a clear bear trend. It plummeted past the 200% line and seemed to have found support at the 300% line. A market that’s testing the 300% line has a high chance of being overextended. Hence, it was reasonable to consider a bullish reversal setup.
- This bullish Harami candlestick pattern overlapped with the 300% line. It offered an excellent opportunity to take on a bullish position with limited risk.
- The MACD divergence gave further support for a long setup.
- After breaking the bearish trend line, the market meandered for a period. Eventually, a bullish trend unfolded.
Bearish Harami Example
- The market was in a dominant bullish trend. Using the main swing pivots, you can draw a bullish trend channel.
- This bearish Harami overlapped with the 200% line, suggesting an overextended bull trend. On top of that, this Harami candlestick pattern had an excellent form. Its first bar was a wide-range bullish trend bar that was likely exhaustive.
- A bearish MACD divergence was easy to spot.
- The Harami setup was not triggered immediately. However, the market did not follow through with the bullish thrust as well. After several days of congestion, the market broke down and reversed into a bearish trend.
The Harami is a short term price trigger that includes an exhaustive thrust bar. The trend channel offers context from a price action angle. The MACD divergence relies on the concept of price momentum.
But do not clobber every trading tool and pattern together to form your strategy. Instead, be selective of what you add to your charts.
And most importantly, master each individual tool before combining them.